Open For Cana(da)-Business? Considerations for Foreign Entities Looking to Enter the Canadian Cannabis Market

Since the inception of the Marihuana for Medical Purposes Regulations in 2013, Health Canada has received thousands of applications from growers seeking approval to become licensed producers (“LPs”). Of those applications, Canada has approved less than 2%. To date, there are only 39 LPs in Canada. These are the fortunate few who are legally permitted to cultivate and/or sell cannabis and/or cannabis oil for medical purposes in Canada under what is now the Access to Cannabis for Medical Purposes Regulations (“ACMPR”). In reality the number of distinct LPs is even less than 36 as a number of corporate families now own multiple licenses, through the acquisition of existing LPs or otherwise.

Canada’s budding legal recreational marijuana market is already attracting foreign companies with significant expertise wishing to enter the field when the Canadian government legalizes cannabis, which could occur as early as this spring.

Under the ACMPR, the process to become an LP is a stringent and lengthy one, which requires ample time, energy, money and planning. The regulations contain strict requirements for background checks, security clearances, facility reviews, and product testing.

In our view, many of the requirements under the ACMPR licensing process will be carried over to any new licensing process that is established in connection with the legalization of the recreational market. For this reason, those wishing to enter the Canadian market will be at a significant advantage if they anticipate the new legislation by looking to the ACMPR licensing process. Below are four considerations, among many, that need to be considered by foreign companies looking to enter the Canadian market:

Licenses are Property-Specific

Under the ACMPR, licenses to grow are issued in connection with individual properties. If a LP wishes to expand operations to another property, it has to submit for an additional license, which, as indicated above, is a time consuming and expensive process. As such, companies who wish to enter the Canadian market not only need to secure at least an option to lease on a property, but also will be well served to give future expansion consideration when selecting a property and negotiating a lease option or lease.

The Future is in Oil

Experienced industry participants know that cannabis oil and extract products have been at the forefront of development in the marijuana industry. This is due to a number of reasons. First, from a medical perspective smoking anything is questionable for your health. Second, cannabis oil and capsule products bring with them the ability to more properly control the amount of each dose and therefore bring a level of consistency in consumption over time that is not found in dried marijuana. Lastly, and perhaps most importantly for LPs, cannabis oil products can easily sell for more than twice the price of the equivalent amount of dried marijuana.

Under the ACMPR, cannabis oils are subject to their own additional requirements and specialized testing. Foreign companies, especially those who already have developed expertise in oil and extracts in their home markets, may be able to provide immediate and stiff competition to their Canadian counterparts.

Preparation for a Wholesale Distribution Model

Currently, LPs are required to ship direct to patients via mail order. When the recreational market opens, distribution will likely be left to the Provinces to regulate. Indeed, one could argue that under the Canadian Constitution the federal government has no jurisdiction to mandate the method of distribution. Many forecasts predict that the recreational market will bring with it new avenues of distribution, including wholesale. Obtaining lease options on retail storefronts is only one way to prepare for a new distribution framework. Forming legal partnerships with existing entities such as clinics and established (albeit illegal) dispensaries may serve new participants well.

LPs should be armed with Compliance and Enforcement Plans

One of the major policy themes underlying the pending legalization of the recreational market is public safety. As such, we do not believe that regulatory requirements will become more lax when the recreational market is introduced. If anything it will be the opposite.

As it stands, LPs are subject to the possibility of unexpected inspections by the federal government. With so much at stake it behooves licensees to develop detailed compliance and enforcement plans to ensure that the physical facility will stand up to security and production spot checks and that the product passes quality control, packaging and advertising requirements.

Import and Export Permits

Under the ACMPR, LPs may apply for permits to import and/or export marijuana or cannabis produced for the purpose of testing cannabinoid content. The use of import and export permits comes with additional record-keeping requirements under the ACMPR, and will also require LPs to ensure compliance with other legislation like the Customs Act rules on declaring imports. LPs who plan to import and/or export should be aware of the strict requirements of doing so.